Practice Test 8 - Donald & Jackie

Question 1

Identify the additional information that you would need to advise Donald and Jackie on how to generate sufficient income in retirement.

Answer 1

• Income required/capital required.
• Planned retirement date.
• Income from savings/investments.
• Downsizing/willing to use other assets/expected inheritances.
• Health/lifestyle/smoking/eligible for impaired life annuity.
• Pension contribution history/carry forward available.
• State benefit entitlement/BR19.
• Asset allocation on pensions/charges/guaranteed annuity rates/statements/fund choice/projections.
• Any other pensions/auto-enrolment staging date for Jackie.
• Affordability/budget.
• Use of ISA allowances/Capital Gains Tax exemptions.
• Capacity for loss.

Question 2

State seven advantages and seven disadvantages of using flexi-access drawdown to take Donald’s retirement benefits rather than using a lifetime annuity.

Answer 2

Advantages
• No income limit/flexibility of income/income can be varied.
• Not locking into an annuity/poor annuity rates/can purchase later/rates may improve.
• Donald is in poor health so can delay decisions.
• Tax-efficient income.
• Flexible death benefits/annuity/income/lump sum.
• Tax free death benefits/flexibility of beneficiary/can nominate beneficiary.
• Potential investment growth.

Question 3

State the death benefit options that would be available if Donald transfers his pension to a flexi-access drawdown plan and the taxation treatment of these death benefits.

Answer 3

Disadvantages
• Complexity/ongoing decisions/need for regular reviews.
• Annual allowance reduced to £4,000 per annum.
• Investment risk/fund could be depleted.
• Income not guaranteed.
• Annuity rates may fall further.
• Legislation may change.
• Charges.

Question 4

Comment briefly on the suitability of Donald and Jackie’s personal investments.

Answer 4

• Lump sum/transfer lump sum to children.
• Continued drawdown (by nominated beneficiary).
• Purchase annuity.
• Before age 75 all options are tax-free to recipient within two years of death.
• After age 75 income/lump sum taxed at recipient’s marginal rate.

Question 5

Recommend and justify how the tax-efficiency of their investments could be improved in the current tax year 2015/2016. Ignore Inheritance Tax in your answer.

Answer 5

• Investments may not match their attitude to risk/Donald’s pension fund may be too high risk.
• Poor returns from cash holdings/low interest rates.
• Funds may not be managed ethically.
• Not all held in ISA’s.
• Too much held in Donald’s name/Donald is a higher rate taxpayer (HRT)/not using Jackie’s basic rate tax (BRT) band.
• Portfolio holds a diversified range of asset classes.

Question 6

State why Donald and Jackie should each consider arranging a Lasting Power of Attorney and explain briefly how these would be set up.

Answer 6

• Donald is a HRT and Jackie is a BRT.
• Use ISA allowances/tax-free NS&I.
• Bed & ISA current holdings.
• Tax free growth/income/tax-efficient/no Capital Gains Tax (CGT).
• Transfer deposit account to Jackie saves 20% Income Tax on interest/use Personal Savings Allowance.
• Transfer collectives to Jackie to save 25% HRT on dividends/both to use £5,000 Dividend Allowance.
• Reduce CGT to 10% from 20%/saves 10% CGT.
• Utilise CGT exemptions/crystallise losses.
• Inter-spousal exemption/no CGT.
• Transfer investment bond to Jackie.
• BRT liability covered in bond/no further tax to pay on withdrawal/5% tax deferred withdrawals.
• Pension contributions for Donald/Jackie/venture capital trusts/enterprise investment scheme.
• Tax relief/pension commencement lump-sum/tax-free growth on pension/tax reducer.

Question 7

List six key areas for investment which may be excluded by socially responsible investment managers.

Answer 7

• Donald is in poor health.
• Lasting Power of Attorney (LPA) ensures affairs can be managed efficiently/peace of mind/personal wishes known.
• Complete paperwork/signed/witnessed/dated.
• Property and Financial affairs LPA.
• Health and Welfare LPA.
• Register with the Office of Public Guardian (OPG)/pay fee to OPG to register.
• Must be arranged before they lose mental capacity.
• Appoint attorneys/each other.
• Choose replacement attorneys/appoint children in case both fall ill.

Question 8

State five drawbacks of using a socially responsible investment strategy.

Answer 8

• Tobacco/alcohol.
• Religious issues.
• War zones/weapons/armaments.
• Environmental issues/pollution/energy companies.
• Animal welfare.
• Social/political policies.
• Exploitation of labour/excessive remuneration.

Question 9

Donald has retired and entered a flexi-access drawdown arrangement.
Identify seven issues relating to this arrangement that you should discuss with Donald and Jackie at your annual review meeting.

Answer 9

• Restricted fund choice/restricted investment options.
• Higher fund charges/passive investment rarely available.
• More volatile/higher risk/usually small and medium size enterprises.
• Limited dividend income.
• Potentially lower growth/poorer performance.
• Difficult to screen large companies/opaque business structure.